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Posts Tagged ‘Predictably Irrational’

In February, John Tierney wrote a great column in February for the New York Times about Dan Ariely’s new book, Predictably Irrational. We already posted about Ariely’s book last week (see here). In this post, we simply wanted to highlight Tierney’s excellent summary of some of Ariely’s experiments.

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In a series of experiments, hundreds of students could not bear to let their options vanish . . . .

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They played a computer game that paid real cash to look for money behind three doors on the screen. . . . After they opened a door by clicking on it, each subsequent click earned a little money, with the sum varying each time.

As each player went through the 100 allotted clicks, he could switch rooms to search for higher payoffs, but each switch used up a click to open the new door. The best strategy was to quickly check out the three rooms and settle in the one with the highest rewards.

Even after students got the hang of the game by practicing it, they were flummoxed when a new visual feature was introduced. If they stayed out of any room, its door would start shrinking and eventually disappear.

They should have ignored those disappearing doors, but the students couldn’t. They wasted so many clicks rushing back to reopen doors that their earnings dropped 15 percent. Even when the penalties for switching grew stiffer — besides losing a click, the players had to pay a cash fee — the students kept losing money by frantically keeping all their doors open.

Why were they so attached to those doors? The players . . . say they were just trying to keep future options open. But that’s not the real reason, according to Dr. Ariely and his collaborator in the experiments, Jiwoong Shin, an economist who is now at Yale.

They plumbed the players’ motivations by introducing yet another twist. This time, even if a door vanished from the screen, players could make it reappear whenever they wanted. But even when they knew it would not cost anything to make the door reappear, they still kept frantically trying to prevent doors from vanishing.

Apparently they did not care so much about maintaining flexibility in the future. What really motivated them was the desire to avoid the immediate pain of watching a door close.

“Closing a door on an option is experienced as a loss, and people are willing to pay a price to avoid the emotion of loss,” Dr. Ariely says.

Dan Ariely, Professor of Economics at Duke University, has an article in the UK publication “The Independant,” in which he details some of the scenarios his team studied that show how people can behave irrationally in various situations. Part of the article is excerpted below.

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Relativity

Next time you hit the town in search of a date, take a friend who looks similar to you, but is slightly less attractive. We presented participants with two portraits – Mike and John – and asked them to choose whom they’d rather date. For half the participants we distorted the picture of Mike and added it to the set, so they had John, Mike and an ugly version of Mike to choose from. For the other half of the students, we distorted John, so they had Mike, John and an ugly John.

When the ugly version of Mike was presented, the attractive version of Mike became the most desirable date. And when the ugly version of John was presented, John’s attractive version became the most desirable.

It is very hard for us to evaluate things in absolute terms. So, we evaluate products and people in relative terms, which makes us vulnerable to this kind of trap, called the asymmetric dominance effect.

Spending power

We asked a group of MBA students to write down the last two digits of their Social Security number next to the descriptions of a few products. We then asked them if they would pay the amount of money indicated by these numbers (79 became $79 and so on) for each of the products.

We then asked them to bid on the items in an auction. It turned out that people with higher Social Security numbers were willing to pay more.

What was going on? It’s not that people with high Social Security numbers are willing to pay more for everything in general. Instead, it is what’s known as the power of first decision. Once people start thinking of something as having a specific value, they do so not just once, but repeatedly.

So we live in two worlds: one characterized by social exchanges and the other characterized by market exchanges. And we apply different norms to these two kinds of relationships. Moreover, introducing market norms into social exchanges, as we have seen, violates the social norms and hurts the relationships. Once this type of mistake has been committed, recovering a social relationship is difficult. Once you’ve offered to pay for the delightful Thanksgiving dinner, your mother-in-law will remember the incident for years to come. And if you’ve ever offered a potential romantic partner the chance to cut to the chase, split the cost of the courting process, and simply go to bed, the odds are that you will have wrecked the romance forever.

My good friends Uri Gneezy (a professor at the University of California at San Diego) and Aldo Rustichini (a professor at the University of Minnesota) provided a very clever test of the long-term effects of a switch from social to market norms. A few years ago, they studied a day care center in Israel to determine whether imposing a fine on parents who arrived late to pick up their children was a useful deterrent. Uri and Aldo concluded that the fine didn’t work well, and in fact it had long-term negative effects. Why? Before the fine was introduced, the teachers and parents had a social contract, with social norms about being late. Thus, if parents were late — as they occasionally were — they felt guilty about it — and their guilt compelled them to be more prompt in picking up their kids in the future. (In Israel, guilt seems to be an effective way to get compliance.) But once the fine was imposed, the day care center had inadvertently replaced the social norms with market norms. Now that the parents were paying for their tardiness, they interpreted the situation in terms of market norms. In other words, since they were being fined, they could decide for themselves whether to be late or not, and they frequently chose to be late. Needless to say, this was not what the day care center intended.

But the real story only started here. The most interesting part occurred a few weeks later, when the day care center removed the fine. Now the center was back to the social norm. Would the parents also return to the social norm? Would their guilt return as well? Not at all. Once the fine was removed, the behavior of the parents didn’t change. They continued to pick up their kids late. In fact, when the fine was removed, there was a slight increase in the number of tardy pickups (after all, both the social norms and the fine had been removed).

This experiment illustrates an unfortunate fact: when a social norm collides with a market norm, the social norm goes away for a long time. In other words, social relationships are not easy to reestablish. Once the bloom is off the rose — once a social norm is trumped by a market norm — it will rarely return.

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To listen to an interesting, nine-minute All Things Considered interview of Dan Ariely, click here. In addition, a podcast with an interview of Professor Ariely and describing more of his research can be found at Open Source, while an interview with him from ABC Radio National can be heard by clicking here. Image from Harper Collins. We’ll have another post on Ariely’s book later this week.